Executive Summary

While the fiduciary debate has become heated in the US in recent years, from the Department of Labor’s fiduciary rule, to the potential that the SEC will take up its own fiduciary rule, and the latest proposed revisions to the CFP Board’s fiduciary Standards of Conduct, the reality is that the recent fiduciary proposals are not an isolated case. In fact, the movement to applying a fiduciary standard to financial advisors is a global phenomenon over the past decade, for which the fiduciary proposals in the US have actually been mild by comparison to many other countries that have outright banned commissions altogether!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the major fiduciary movement that is occurring globally, how fiduciary proposals have rolled out in other countries (including the U.K., Australia, India, and the Netherlands), as well as the industry shifts that commonly happen after a new fiduciary rule is implemented, and the role that technology has played in fueling this global movement.

First and foremost, though, it is important to acknowledge that the movement to apply a fiduciary duty to financial advisors is truly is a global movement. India was one of the first countries to take action, banning upfront commissions on open-ended mutual funds all the way back in 2009. Australia followed with their Future Of Financial Advice (FOFA) reforms in 2012, which ultimately led to a ban on investment commissions as well. Similarly, the United Kingdom in 2013 implemented their Retail Distribution Review (RDR), which similarly led to a ban on investment commissions in the U.K., and the Dutch implemented a commission-ban that year as well. And in most countries, regulators gave the financial services industry only 12-18 months to prepare for the reforms. Which makes the recent DoL fiduciary proposal in the US, and its extended transition period, seem “mild” by comparison!

The fact that fiduciary rules have been implemented in other countries also gives us the opportunity to see the likely fallout that occurs when financial advisor regulation changes. The common trend in most countries has been that, after adopting new fiduciary rules, the headcount of “financial advisors” appears to decline between 10% and 30%. Notably, though, the individuals who leave appear primarily to be not bona fide financial advisors, but simply those who wrote “Financial Advisor” on their business card, but acted solely as a salesperson… and simply decide they don’t want to actually be responsible for giving financial advice, once the investment commissions are no longer available! Which ironically just leaves even more opportunity for the actual financial advisors who remain behind!

With the fiduciary trend occurring on a global basis simultaneously, one might wonder what it is that has led so many countries to implement fiduciary rules in quick succession. The answer, in a world, appears to be: technology. Because around the world, the rise of the internet has made it easier and easier for consumers to access the financial products they want and need directly, without a financial advisor to sell it to them (and earn a commission)… which makes consumers begin to ask “why am I paying a financial advisor for a product I could buy online anyway?” And forcing advisors to actually begin to give bona fide advice, and not just the “advice” necessary to sell a product. In turn, the rise of financial advisors actually focusing on giving advice makes the fiduciary rulemaking a natural outcome. Because when the majority of advisors actually focus on advice, what standard could possibly apply to advice besides one that requires the advice to be in the best interests of the consumer receiving the advice!?

Ultimately, though, the key point is simply to recognize that as technology commoditizes financial products and increasingly forces advisors to focus on truly giving advice, fiduciary rules to hold that advice accountable to an appropriate standard are inevitable… and thus, the fiduciary movement has quickly become a global phenomenon. Which means our battle over the DoL fiduciary rule is not merely some esoteric isolated debate going on here in the U.S… as the fiduciary movement is impacting consumers and advisors worldwide!

#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone! Welcome to Office Hours with Michael Kitces.

For today’s episode, as you can see, I’m not quite in my usual location here. I’m in beautiful Sydney, Australia. You can see the Sydney Opera House right there behind me, as well as the financial central business district for Sydney.

I’m here in Australia talking to financial advisors today. This is part of an ongoing trip I’ve had. I was in Mumbai, India, at the beginning of this week talking to financial advisors there as well. And the theme of all the talks I’ve been giving over the past week as I go to different countries has been very consistent. It’s all about the phenomenon of what’s happening globally as financial advisors adopt the fiduciary movement around the world.

When I look at India, they were one of the first that started this process. India banned upfront commissions all the way back in 2009 on open-ended mutual funds and forced distributors to only pay ongoing trails and a and a small back end load if people liquidated their funds quickly. Australia created what they call their Future of Financial Advice (FOFA) reforms in 2012, that ultimately led to a ban on investment commissions. The United Kingdom, in 2013, had what they called their Retail Distribution Review (RDR), which ultimately led to a band of investment commissions and the rise of financial advisors in the U.K. The Netherlands did the same thing in 2013, banning investment commissions.

And so, all of these countries around the world have been putting through bans on investment commissions and implementations of fiduciary duty best interest standards. Different countries use different languages, but it has all been built around this idea that advisors who give advice shouldn’t be getting paid commissions from fund companies to distribute products, but rather should be getting paid compensation directly from their clients for their advice to create the necessary objectivity that comes when you get paid by a client (and not paid by a company to distribute their products).

The Industry Shifts That Result From Fiduciary Movements [Time – 2:29]

And it’s leading to a very common set of shifts that happened in the aftermath around the world. Almost every country that implements a fiduciary policy sees a fairly immediate drop in the number of financial advisors that are there. It seems to vary by country, but often numbers like 10 to 20% or so seem to leave the business. But the interesting phenomenon I find when I talk to advisors on the ground in every single one of these countries is that the advisors who are leaving when a fiduciary rule comes and a commission ban comes is the same almost every time.

The people who leave are the ones who wrote financial advisor on their business card, but they weren’t really financial advisors they were product salespeople. All they did was sell things to as many people as they could and get paid as much in commissions as they could. It’s not a huge portion of the industry but it’s a good 10 or 20 or 30% of the industry. And as soon as commission bands come through and they say, well, you can’t get paid high commissions anymore, you can only get paid to actually do the work of giving someone advice and justifying your value based on the quality or advice. They say, “Nah, forget it. I’m going to go do something else instead. I’ll sell something in some other industry that’s easier to sell and pays me more quickly.”

And so, the shift that we really begin to see as these countries go through a transition is this recognition that, in most countries around the world, lots of people write financial advisor on their business card, but not all of them necessarily have the training, competency, education or ability to actually get paid to give advice. And so, once you eliminate commissions and you require a fiduciary duty to be put in place, it becomes very noticeable who’s actually able to give advice and not. You know, it’s kind of like the old Buffet saying, “Once the tide goes out you see who’s been swimming without their shorts on.” Very similar phenomenon seen happen as commission bans and fiduciary rules come in place around the world.

Now, one of the things I want to touch on is why this seems to be happening globally. I mean it’s a very fascinating thing to me when you recognize that in the span of less than a decade, commission bans or fiduciary rules are not only getting proposed in the U.S. but it happened in Australia, the U.K., India, the Netherlands, Canada is now working on a lightweight version called CRM2. South Africa even has been putting through a version of a fiduciary rule.

This is an incredibly global phenomenon. Virtually every country that has a well-established base of financial advisors is going through a very comparable set of reforms. And ironically, in the U.S. we actually have one of the mildest versions because we’re not banning investment commissions we’re simply elevating some of the accountability standards around fiduciary. Most other countries completely banned commissions.

So, our version of fiduciary rules has actually been relatively mild compared to what we’re seeing around the globe. But the reason why it’s happening so consistently around the globe I think is actually a kind of indirect byproduct of the rise of technology and actually the internet over the past 20 years. I still don’t think it’s been fully appreciated for how much technology completely changed the nature of being a financial advisor.

How Technology Changed The Nature Of Being A Financial Advisor [Time – 5:50]

Because if I dial the clock back to the 1980s and the 1990s, if you wanted to get access to investment products, you had to go through a financial advisor that sold mutual funds within most countries around the world. There are very, very few options for direct to consumer mutual funds. A couple of companies did it as a special offering. Vanguard notably in the U.S., T. Rowe Price had a fairly hefty direct to consumer distribution, but it was a fund company strategy. You might say, “Hey, we’re going to try to work around advisors and spend tons of money going directly to consumers,” but that was the exception rather than the rule. Most fund companies around the world distributed through financial advisors, who they paid as salespeople, and paid them commissions to sell their funds.

Then the internet showed up. And by the early 2000’s, two things started happening at the same time. One, there was a huge increase number of fund companies that started going direct-to-consumer. Because they said, “Oh, this is awesome. We just make a website and the consumers can come to us directly and buy our products.” It’s much easier to do direct-to-consumer distribution.

The second phenomenon that happened was the rise of online brokerage platform. So, in the in the U.S., this would be E*TRADE, Schwab.com, the early versions of T.D. Ameritrade Online. And all the sudden consumers that wanted to buy mutual funds could just go online and buy it themselves. And since they were just buying it themselves, they bought a no-load, a no-commission version of the fund, and we started running these in parallel. Commission-based funds sold by advisors, no load funds sold directly to consumers through online brokerage platforms.

And what’s happened is over 15 years of that phenomenon, a growing number consumers just start saying, “Why would I pay you a financial advisor just to pick a mutual fund when I could look a fund up online through the Kiplinger Magazine or Money Magazine or research it on MorningStar or Yahoo Finance, you know, if you’re going to do something for me as an advisor, you’ve got to do something above and beyond just a mutual fund, like give me some actual advice about how to allocate my portfolio or how to manage on my financial life.”

And so, the shift that’s happened in almost every country around the world, as technology has essentially eliminated the need for advisors just to sell mutual funds is that advisors had to start giving advice, actually really becoming financial advisors, which was written on their business card and not just trying to sell mutual funds. But as advisors began to actually give advice, the regulatory conflicts emerged.

And I think that’s why we’re seeing this fiduciary phenomenon around the world over the past decade because it’s only the past decade that the majority of advisors who write financial advisor on their business card are actually in the business of giving advice. And as soon as advisors start actually focusing on giving advice, it quickly becomes obvious to regulators in every country around the world that it’s not a good thing when people who are supposed to give objective advice are getting compensated primarily by commissions from fund companies. Not that customers shouldn’t necessarily invest in mutual funds, if they’re good funds and valuable that’s great, but let the advisor pick them objectively after being compensated by the client, not because they were compensated directly from the fund company.

And so, this ongoing shift of advisors moving out of “I sell products” and into “I create, asset allocated portfolios, manage them and give you ongoing advice” is creating this ongoing shift of advisors actually becoming advisors and regulators saying. “Well, if you’re really going to be an advisor then we’re going to regulate you that way.” Which means a fiduciary duty starts coming up in Australia in the U.K., in India, one after the other around the world as this phenomenon shifts.

Trends We Are Likely To See Continuing To Emerge From Here [Time – 9:19]

Now, the reason why this is interesting to me beyond just the nature of the global phenomenon is that I think there’s a lot of trends that we’re likely to see emerging and continuing to emerge from here. Because the problem we really have, and I think this is true in the U.S, as well as other countries around the world, is that so much of the ecosystem that supports financial advisors is still at the end of the day built primarily around what we do upfront to get a client. Because if you were paid a commission for a mutual fund, all you really care about at the end of the day was getting someone to sign into business.

Once we’re in the ongoing advice business, we have to actually get good at ongoing advice. One of the common comparisons that’s made between commissions and fees is that over the long run. It’s actually quite possible you’ll pay more in fees than you will in commissions. I think the simplified example of a 5% commission mutual fund upfront or a 1% AUM fee, after five years I will have paid five 1% fees. That adds up to the same thing as the 5% commission. And in over 10 years, I’ll actually have paid ten 1% fees, which is more than the 5% commission as long as no one else had come in and sold a new 5% commission fund to replace the first one. You buy and hold both. You may actually end up paying more in the fees than you do in the commissions.

But here’s the distinction, if I sell a 5% commission fund, I only get paid once upfront. All you’ve got to do is convince someone once to do business with me and I get paid. And it frankly doesn’t even really matter if I called them again after that. I might continue to stay in touch with them only because I want more commission opportunities, but there’s no real obligation for in-depth ongoing advice services because I already got paid.

If I’m going to get paid 1% a year over the next five years because I want to add up to the same thing as the commission, I have to justify my value, my reason for existence, what I do to earn my fees every single year on an ongoing basis. And that pressure to justify ongoing value, I think it’s creating all sorts of new pressures and challenges on us as financial advisors not only to just figure out how to explain ongoing value that we provide but to actually be able to deliver it and have the technology to help.

And so, we see all these gaps, to me, in the current landscape. One of the biggest ones that frustrates me these days is our financial planning software. It’s built so focused on doing an upfront financial plan for our client and very, very little about how to help clients on an ongoing basis thereafter, right? Why don’t we have goal tracking where we can show how a client has progressed through seven years of relations with us. “Hey, you started here…” and the financial planning software automatically tracks then you were here, then you were here, then you were here… And the client can see their sense of progression over time by working with us. Maybe even showing milestones of significant accomplishments that we’ve achieved along the way. The planning software should automate all of the monitoring.

You know, we see only a few planning software still that automate account aggregation or pull it in a financial planning software so I can just log in the software anytime, 24 hours a day, seven days a week, 365 days a year, to see what’s actually going on with my financial plan on an ongoing basis. Yet if my value is primarily what I’m going to do for my clients in years two, three, four, five, six, seven, eight, nine, ten and beyond, frankly, the bulk of what we do in our financial planning software should be what comes after the initial plan not upfront.

One of the other interesting phenomena that we’re seeing very much here and now I’m finding in Australia and the U.K., starting in India, and certainly, I think that we’ve actually seen the U.S., is once advisors start getting paid for advice and not necessarily getting paid by fund distributors, it starts raising questions about why am I even affiliated with this fund company broker-dealer bank, whatever the financial institution is, because it varies a little country by country, but all of them have these larger vertically integrated asset management distribution divisions. But when the advisors start just getting paid fees for their advice, they start saying, “Well, why am I associated with his big company that takes a huge portion of my compensation. Why don’t I just go independent and get paid for the advice directly myself?”

So, in the U.S. we see the rise of the RIA movement. When I was speaking India earlier this week, I was speaking for a company called iFast. For U.S. advisors, you can think of iFast as the first RIA custodian. India just created fiduciary RIAs a few years ago. iFast is the first custodian that’s building for them, doing what in the U.S. we would think as simple things, but in India’s rather new. Like iFast is the only platform in India where as an RIA, you can actually bill and sweep your fees from investment accounts. No other provider can do that yet because the RIA movement is that new in India. Over a billion people, a few hundred RIAs, one platform. Tremendous opportunity for them.

But the shift that we’re seeing from countries around the world is as advisors start getting paid fees, not necessarily commissions for investment distribution, they begin shifting more independent. And the more that they go independent, the more they demand technology to support them. And the more technology that gets created, the easier it is to be independent and the more firms there are that go independent.

One of the biggest conversations I’ve been having with a lot of companies here in Australia lately is you’d better be ready for an excess of advisors that are pushing towards independence because that’s what we see in almost every country around the world. The U.K., there’s already been a dramatic shift towards advisors going independent.

And so, be aware that these kinds of ongoing shifts are happening around the world. And for all of us that are advisors in the U.S., to just understand that the fiduciary phenomenon is not just some peculiar thing that’s cropped up in the U.S., or some esoteric debate that’s happening between broker-dealers in RIAs or between the DoL and the SEC. This is a global phenomenon driven by the fundamental fact that financial advisors around the world are shifting from primarily being the business of selling insurance investment products to actually being in the business of giving advice.

Because the technology is actually making it easier and easier for consumers to buy their products directly, which means advisors have to do something more on top. Whether that’s ongoing investment management and portfolio monitoring, asset allocated portfolios, or broader financial planning specialization niches… all of these things are what come as advisors try to demonstrate their ongoing value and differentiate themselves in a world where it’s really, really not actually about the products anymore. Not that clients don’t need to be invested and that we won’t still have a role in seeing where the dollars go, but it’s not what we’re paid for anymore, and that’s what’s driving this global fiduciary phenomenon.

I hope that’s a little bit interesting, and some food for thought about what’s happening around the world and that you’ve enjoyed a little bit of the Sydney morning sunrise going on behind me with the Opera House in the financial district here.

This is Office Hours with Michael Kitces. Normally 1:00 p.m. East Coast time on Tuesdays. I missed that by little bit here since the time zones didn’t quite line up, but thanks for hanging out and joining me everyone, and have a great day!

So what do you think? Has the fiduciary movement become a global phenomenon? Has technology played a role in this movement? What other trends might we see emerge from here? Please share your thoughts in the comments below!

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.